Report on the Consumer Credit Fairness Act

A.2382 (M. of A. Weinstein)
S.153 (Sen. Thomas)

AN ACT to amend the civil practice law and rules, in relation to consumer credit transactions.

Consumer Credit Fairness Act

THIS BILL IS APPROVED WITH SUGGESTED MODIFICATIONS

The Civil Court and Consumer Affairs Committees of the New York City Bar Association submit these comments in support of the Consumer Credit Fairness Act (CCFA). This bill would amend the New York Civil Practice Law and Rules to ensure that persons who are sued in lawsuits arising out of consumer credit transactions – i.e., debt collection lawsuits – receive the benefit of fair procedures, by requiring, for example, that a creditor or debt buyer plead basic information about an alleged debt before being allowed to proceed. The Committees believe that this legislation is necessary to maintain a basic level of fairness and due process with regard to the adjudication of debt collection disputes in the New York State courts. The committees supported this bill with recommendations when it was last introduced in 2015, and continue to support it. The underlying facts have not changed, and therefore the bill is as important now as it was when last reviewed by the City Bar.

New York courts have long suffered under the weight of debt collection lawsuits that creditors, debt buyers, and debt collection law firms file in bulk every year. In 2018, 100,186 consumer credit lawsuits were filed in the New York City Civil Courts alone.[1] The defendants in these cases are overwhelmingly low- and moderate- income New York residents, many of whom are elderly or disabled, and nearly all of whom are unrepresented. Additionally, survivors of domestic violence are particularly vulnerable to such debt collection practices as they may be encumbered with their abuser’s debts through coercion or identity theft, and prevented from obtaining economic independence.[2] Default judgments – automatic wins for the debt collector when the defendant does not answer – were entered in approximately 41% of the consumer debt cases filed in one year.[3] This past year, in 2018, 38,569 default judgments were entered against consumers in the New York City Civil Courts.[4] The consequences of these judgments can be devastating, and can result in frozen bank accounts and garnished wages which prevent New Yorkers from being able to support their families. Such judgments can also destroy a defendant individual’s credit rating, making it harder for New Yorkers to secure housing, employment, or affordable credit.

The Committees have serious concerns about the fairness of these proceedings for several reasons.

First, evidence suggests that defendants often do not receive notice that they are being sued. Many of the process servers hired to serve papers in consumer credit actions engage in “sewer service” – the practice of failing to serve court papers and filing false affidavits of service with the courts, an issue that has been of concern to the City Bar for years.[5] In 2009, the New York State Attorney General brought civil and criminal charges against a process service agency that allegedly failed to serve New Yorkers in a hundred thousand cases.[6] The New York City Department of Consumer Affairs (DCA) promulgated a set of rules in 2011 to better monitor the actions of process servers licensed in the City.[7] Still, based on the experiences of their members, the Committees believe that the practices that the Attorney General and DCA addressed are far from unique, and remain common in consumer credit actions.[8]

Second, a significant number of debt collection cases are filed by debt buyers, not original creditors. Debt buyer plaintiffs often possess little or no information regarding the underlying debt, the account holder, and the account’s payment history, and any information they do have is often inaccurate. Especially in an era when identity theft and mistaken identity are rampant, and when a single judgment can block someone from obtaining employment, housing, and affordable credit, the Legislature should ensure that any New Yorker sued on an alleged debt receive basic information about that debt, so the defendant can determine whether he or she is being sued on a valid claim and is indeed the proper defendant in the case. This requirement would also help prevent New York courts from routinely entering default judgments on invalid debts.

Third, whereas all plaintiffs in consumer credit actions are represented by counsel, approximately 96% of defendants are not.[9] Unrepresented New Yorkers are at a significant disadvantage. These defendants routinely, and unknowingly, waive critical defenses, such as the lack of personal jurisdiction, the plaintiff’s lack of standing to bring the claim, or the expiration of the statute of limitations (which in New York can be as short as three years). The statute of limitations defense is especially important given that debt buyers routinely sue people on time-barred debts; in fact, four of the nation’s biggest debt buyers entered into settlements with former New York Attorney General Schneiderman over claims that they had, in the aggregate, obtained approximately 7,800 judgments against New Yorkers on stale, time-barred debts.[10] Similarly, unrepresented defendants often question whether they actually owe the debt for which they are being sued, but do not know that they have the right to ask the plaintiffs for proof of their claims. Meanwhile, debt buyer plaintiffs and their attorneys can take advantage of complicated rules of civil procedure and lax pleading requirements to the disadvantage of unrepresented defendants.

As the New York Attorney General has noted, some debt collection companies practice “overbiffing” – collecting on “phantom debts” by demanding more money than they are owed.[11] Furthermore, prior to any legal action, some companies falsely tell consumers that they would face felony charges and be jailed if their debts remain unpaid.[12] In an effort to combat unscrupulous debt collection practices, former New York Attorney General Underwood sought and obtained court orders permanently banning several such businesses that preyed on consumers by falsely threatening them with arrest and adding unauthorized amounts to consumers’ debts, and received court ordered restitution and damages of $27 million.[13]

In his 2014 Law Day announcements, then New York State Chief Judge Jonathan Lippman discussed the Judiciary’s “obligation to prevent inequitable debt collection practices in the courts and ensure a fair legal process for all litigants.”[14] During his remarks, he announced a series of rules that the Office of Court Administration (OCA) was issuing with respect to certain consumer credit actions.[15] While the OCA rules continue to provide strong, critical protections for defendants, the rules are limited in their application in two significant ways. First, the OCA rules apply only to debt collection cases involving an alleged credit card debt – and not, for example, to cases brought on medical, auto, student loan, or other kinds of consumer debt, such as alleged unpaid rent against former tenants.[16] Second, except for one provision that addresses the “sewer service” problem, the OCA rules concern only the default judgment phase of debt collection proceedings. The rules do not, for instance, introduce additional pleading requirements to protect defendants from pleadings that lack even the most basic information about the alleged debt. To the extent there is any overlap between the CCFA and the OCA rules, it is still critical to enact the CCFA, as legislatively-enacted statutes are less subject to change than rules promulgated by agencies.

The New York State Department of Financial Services (DFS) has also issued debt collection rules that require, among other things, better disclosures to consumers regarding their alleged debts. The DFS rules, however, apply only to pre-litigation debt collection, and thus have no overlap whatsoever with any of the provisions in the CCFA. What both OCA and DFS rulemaking as well as the Attorney General’s enforcement actions do show is that debt collection abuses are so widespread in New York State that several agencies have identified the need, and have taken steps, to ameliorate the problems. But these agencies’ power is somewhat limited, and the Legislature must act to provide the further relief that New Yorkers need.

The CCFA would thus 1) make changes that the OCA and DFS rules do not reach, 2) make the changes by statutory amendment, not agency rule, which makes the changes more secure; and 3) extend key protections in the OCA rules to all types of consumer credit cases.

KEY FEATURES OF THE BILL

The key features of the proposed legislation are:

1. Additional notice of the lawsuit. The CCFA would require the court to send an additional mailing giving notice of the lawsuit to the defendant, using a notice, in English and Spanish, and envelope prepared by the plaintiff and submitted to the clerk, before a default judgment could be entered. This requirement would extend a similar protection in the OCA rules to all types of consumer credit cases, so that the protections do not apply only to those arising from an alleged credit card debt.[17]
2. Uniform three-year statute of limitations. Actions arising out of consumer credit transactions would be uniformly governed by a three-year statute of limitations.[18] Pursuant to CPLR § 202, many of the debt collection lawsuits filed in New York are already subject to a three-year statute of limitations, as New York’s six-year statute of limitations does not apply if the original creditor’s home state has a shorter statute of limitations,[19] and four of the biggest credit card issuers – Chase, Bank of America, Capital One, and Discover – are located in states that have three-year statutes of limitations. In addition, thirty other jurisdictions have statutes of limitations shorter than New York’s. This change is one that OCA cannot make by rule.
3. Enhanced pleading requirements. The bill would require that the plaintiff in a consumer credit case plead such basic information as the name of the original creditor, the last four digits of the original account number, the date and amount of the last payment, and an itemization of the amount sought including principal, finance charges, fees, and other items. The plaintiff would also be required to annex a copy of the written contract giving rise to the alleged debt. A debt buyer plaintiff would be required to also allege the chain of title for the alleged debt. This change is not made by the OCA rules.
4. Protection against unintentional waiver of jurisdictional defenses. The bill would permit defendants to raise lack of personal jurisdiction as a defense in an amended answer and preserve that defense for trial without having to file a separate motion to dismiss within 60 days, as under current law, “unless the court extends the time upon the ground of undue hardship.” This is especially important because defendants in consumer credit cases are almost always unrepresented, and routinely have difficulty obtaining information about how plaintiffs claim to have served defendants. Plaintiffs are also often unwilling to comply with defendants’ requests for information. In New York City, the problem is particularly severe because staffing in the court clerks’ offices is inadequate to keep up with the pace at which consumer credit lawsuits are filed. Affidavits of service, which are key to determining whether service was proper, often sit in a filing basket for weeks, or even months, on end in jurisdictions that have not received sufficient resources to embrace e-filing for the cases discussed here.[20] As a result, the clerk’s office may not be able to provide the defendant with the affidavit of service until after the 60 days has passed. This is true even in the rare case where a defendant has a lawyer. Eliminating the 60-day deadline for a motion to dismiss based on lack of proper service is a change that requires a legislative amendment of the CPLR.
5. Clarified default judgment requirements. The bill specifies the evidentiary support required for a debt buyer to obtain a default judgment. Debt buyer plaintiffs would be required to submit an affidavit from the original creditor establishing the existence of the debt and the defendant’s default, together with affidavits proving all assignments of the debt, i.e., the chain of title. In addition, the debt collector plaintiff or its attorney would be required to state in an affidavit that, based on reasonable inquiry, the plaintiff has a reasonable belief that the statute of limitations has not expired.[21] These provisions would extend a similar protection in the OCA rules to all types of consumer credit cases, so that those protections do not apply only to those cases arising from an alleged credit card debt.
6. Enhanced pleading requirements in proceedings to confirm arbitration awards. The petitioner in such a proceeding would be required to plead the terms of the arbitration agreement and annex the agreement to arbitrate, the demand for arbitration with proof of service, and the arbitration award with proof of service.
7. Additional notice must be sent to pro se defendants with the motion for summary judgment. The plaintiff must serve, along with a notice of motion for summary judgment, an additional notice informing the consumer that failure to answer might result in entry of a money judgment. The additional notice also includes information about contesting the motion for summary judgment and legal resources.

Current gaps in our state’s civil procedure laws and rules leave room for abusive debt collection practices, to the detriment of unrepresented defendants. By filling some of those gaps, the CCFA provides for a more level playing field for New Yorkers and promotes judicial efficiency. The bill would ensure that more New Yorkers receive actual notice that they have been sued for a debt; that they are better able to identify the debt or account on which they are being sued, and thus able to include all relevant defenses in their answer; that default judgments are not entered against them for non-meritorious claims; that creditors and debt buyers file claims against New Yorkers in a timely manner so that low- and moderate-income New Yorkers are not unfairly burdened with the excessive accumulation of interest and fees; and that unrepresented New Yorkers do not unintentionally waive the defense that they were improperly served.

SUGGESTED MODIFICATIONS

The Committees would like to offer a few suggested modifications for improving the legislation.

First, we recommend that, in addition to heightening the requirements for applying for a default judgment in consumer credit cases, the CCFA should be amended to provide that applications for default judgments in these cases be reviewed by judges. The current practice of having court clerks review these applications has resulted in the entry of significant numbers of defective default judgments. Court clerks should not be expected to determine whether an application meets minimum evidentiary and legal standards.

Second, we believe the legislation has made significant strides to assist New Yorkers whose native language is not English by requiring that the notices required by the proposed legislation be provided in Spanish as well. We recommend including a provision that would require, in relevant cases, the required forms to be provided in other commonly read languages, such as Chinese.[22]

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Thank you for the opportunity to comment on the Consumer Credit Fairness Act. Should you have any questions, please do not hesitate to contact us.

Consumer Affairs Committee
Darren A. Bowie, Chair

Civil Court Committee
Sidney Cherubin, Chair

Reissued May 2021*